Without Fear, Beyond Reproach: the Reform of the Hydrocarbons Sector

“The impetus of existing plans is always stronger than the impulse to change”

BARBARA TUCHMAN, The Guns of August

In the 1962 Pulitzer prize-winning book, The Guns of August, about how the first 30 days of battle determined the course of WWI, historian Barbara Tuchman tells a story that could go unnoticed in those 477 pages, but serves to prove the consequences of hanging on to dogma without caring about the consequences.

Just before the start of the conflict, General Adolphe Messimy pounded his War Minister desk at the historical Hôtel Brienne, in Paris’ seventh arrondissement. Messimy had been defeated, although not on the battlefield. In 1912, French soldiers wore the same colors since 1829: blue coats and mandatory red hats and trousers. A design from a time when it was necessary that the colors were visible so their frères d’armes could tell them apart amid the chaotic charges and combat among the dense smoke caused by gunpowder. But as WWI approached, which would start in 1914, war technology had changed: the new “white” gunpowder, didn’t produce any smoke, and 19th century tactics had lost relevance considering the reach of heavy artillery, the precision of new rifles, and the fast transition from cavalry to motor vehicles.

Under these new conditions, armies had to make themselves less visible and camouflage with the battlefield to reduce their casualties. That year, other countries that would participate in the conflict had adapted and changed their traditional, colorful uniforms. The British adopted khaki after the Boer War and the German replaced their Prussian blue with gray. Messimy then proposed to change French uniforms to blueish gray or greenish grey, but when the matter was debated at the National Assembly a former minister of War protested:

“That blind and imbecile attachment to the most visible of all colors was to have cruel consequences.”

The War minister understood that there are certain things that must be ruled out, as much tradition as they carry. The events would prove him right.

Beyond Fixation

After the political change as a necessary condition and the cease of this two-decade historic mistake, Venezuela’s immediate future as a country will depend on a long process of substantial reforms.

These reforms require a broad redesign of the state’s legal and institutional framework, which would also need to be implemented quickly and efficiently. Our margin for error will be truly slim.

In Venezuela, the idea of what society and state should be is, to put it this way, truly dogmatic. It has been built with tales of hand-picked historical facts which have been manipulated.

To make this process possible, political parties and the civil society must build a consensus, between them and among them. However, what we find the hardest in this process is the change in the mentality of how society perceives itself and its relation to the state.

The main point here is that, in Venezuela, the idea of what society and state should be is, to put it this way, truly dogmatic. It has been built with tales of hand-picked historical facts which have been manipulated by short-term populist policies and it’s at the center of a social imaginarium, fed by political leaders that prefer to see historic events as supernatural feats. These stories, after a while, were cast into unmovable beliefs that see us a rich country, blessed with natural resources, and as a país potencia, to mention only a few.

It’s really hard to question these assumptions due to the fact that society has absorbed them and made them part of its identity. Whoever tries to do so, may lose political capital, which would make their government unviable. That’s why leaders opt to take the easier road: feed the myths with populist measures that strengthen their charisma and get them more support.

But in Venezuela, that has only been possible during sustained periods of high oil prices. Because these old beliefs assume that oil revenues are infinite and inexhaustible when they only conceal the most basic feature of oil markets: volatility, that every boom will end in a bust and that every bust will end in a boom. Continuously, cyclically, forever.

The unfortunate coincidence of many factors took us to the unimaginable and cruel situation that Venezuelans are going through today. In order to survive it, society will have to abandon long-standing dogmas.

A Legal Framework for Reinvention

Among these reforms, the hydrocarbons sector reform is essential and it must start by approving an entirely new Hydrocarbons Organic Law, as the one contained in the bill presented on 29 April 2020 by the lawmaker Luis Stefanelli before the Energy and Oil Permanent Commission of the National Assembly. Regulations to this law and the supplementary legal framework that would allow its implementation would also need to be approved. Our industry must be reinvented and redesigned in its structure, functioning and focus, and that’s why it must have a new law, made for this very purpose. This law, free of any dogmas, will be the basis for this change. The new bill fits this purpose, having the virtue of being flexible and adaptable enough to serve during the recovery, stabilization and growth periods and as an instrument to deal with the many unknowns that will be encountered along the way. In this sense, this bill was purposely drafted with a skeptical philosophical approach, because dogmatism does not allow us to know what we do not know. And as history and very recent events demonstrate, the hydrocarbon industry is an industry of many unknowns, of many things that cannot be predicted.

Even though that first phase, on its own, would be a huge endeavor, it’s only the first step on the long road of the country’s recovery. However, it’s its implementation, the second and most important phase, which won’t only require a large amount of resources, knowledge and commitment, but also unequivocal and unrestricted support from society.

These old beliefs assume that oil revenues are infinite and inexhaustible when they only conceal the most basic feature of oil markets: volatility.

In our current context, it’s hard to imagine the success of this two-phased plan. However, it’s what we have to do, what must be set as the main goal for Venezuela during the transition to democracy and our future.

However, in order to recover the country, it won’t be enough to have a modern, transparent and adaptable hydrocarbon legal framework and efficient institutions that implement it. We’ll also need an appropriate system to manage the revenue that it generates.

As a matter of fact, we can say that if a country has an efficient oil revenues management system, an oil economy like ours can reach a relative economic, social and political stability even when their legal framework for hydrocarbons is inefficient. This relative stability won’t be possible if we reverse the factors in the premise, less so when both factors are inefficient.

Having said this, it’s almost a certainty that the success and durability of the hydrocarbons sector reform—including its fundamental pillar: a new Hydrocarbons Organic Law—will depend on the system that’s chosen to manage the oil revenues.

In general, the country’s recovery and stability depend on it.

Turning Around the Lessons of 1914

The current crisis is a tipping point for achieving change in the way society thinks about its relationship with the state, and especially with the oil industry. Society must understand fundamental issues, such as who’s responsible for the sector, its actors and how it’s carried out.

We must debate about concepts like sovereignty, rule of law, energy transition, transparency, freedom, and development. It’s mandatory that the nation connects this new idea with reality and facts, the responsibility it demands and the magnitude of the challenges posed by both generating the revenue and its management. Venezuelans must reflect, taking into account recent experiences (even current ones), if it’s convenient for the country to keep depending, almost exclusively, on the hydrocarbons industry. We must also think about whether oil has transformed Venezuela into that prosperous imperium sine fine, promised by everyone for everyone… and reached by no one and for none.

It’s time to readjust these ideas to make way towards recovery, stabilization and the growth of the industry and the country. We must get rid, once and for all—“without fear and beyond reproach,” quoting the French knight Chevalier de Bayard—about these fixed ideas that have only brought cruel consequences.

Let’s hope we can revert the premise of the quotation that opened this essay, that Tuchman used to describe the Battle of Liège. Back then, the armies involved decided to stick to the pre-established plans instead of adapting to their enemies’ strategies and position, despite knowing them in advance. That brought on catastrophic consequences. Hopefully, this time, regarding our country and our oil industry, the impulse to change is stronger than the impetus of existing plans.

We have the duty of making windows where there were once walls (Foucault dixit) for the generations that will have to reinvent the country.

Carlos is a lawyer and an international petroleum consultant. He also teaches international petroleum law and contracts at Queen Mary University and SciencesPo. Carlos rema en La Curiara. His opinions are personal.